Incorporating As Alternative Entities

Investments in entities designed to protect mission may require different terms than investments in traditional entities. Entrepreneurs and investors may also want to establish a mechanism to convert a traditional entity into one of these alternative entities in the future. Once such mechanism is so-called “drag along rights.”

Agreeing on company’s social purpose

The social purpose corporation is a new corporate form that requires directors to pursue a social purpose in addition to shareholder return. State statutes require or allow social purpose corporations to commit to one or more specific social or environmental purposes that fall within statutory guidelines, and obligate the company to publicly report on its performance relative to those purposes.

Term sheet language specific to social purpose corporations may be useful in the following situations:

the corporation will be formed at the time of the investment, and so the social purpose has not yet been defined;

the investors want to modify the definition of social purpose in connection with the investment;

the investors or entrepreneurs want to require the enterprise to benchmark its performance with respect to its specified social purpose against independent third parties; or

the investors want a voice in any future changes to the social purpose and related concepts.

For our sample language, we’ve used language designed for California social purpose corporations because California was the first and most populated state to adopt the social purpose corporation. Adjustments may be required to this language for social purpose corporations formed in other states.

Agreeing on a company’s social purpose:

Sample language: The Articles of Incorporation of the Company shall identify the Company’s special purpose as [special purpose definition].

Third party reference for assessment of social performance:

Sample language: The Company’s annual [social purpose report] OR [special purpose MD&A and any special purpose current reports] shall include an assessment of the overall social and environmental performance of the Company against a credible, independent third party standard.

Requirement of investor approval for change in social purpose and related items (equity):

Sample language: As long as the Investors hold at least X percent of the Shares purchased, [the vote of at least X percent of the Shares, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Director(s)], shall be required to (1) change the Company’s special purpose(s), (2) adopt or change the overall objectives of the Company relating to its special purpose(s), or (3) adopt or change the financial, operating, and other measures used by the Company for evaluating its performance in achieving such special purpose(s).

Requirement of investor approval for change in social purpose and related items (debt):

Sample language: During the term of the Loan, the consent of the Investor shall be required to (1) change the Company’s special purpose(s), (2) adopt or change the overall objectives of the Company relating to its special purpose(s), or (3) adopt or change the financial, operating, and other measures used by the Company for evaluating its performance in achieving such special purpose(s).